Fed’s meeting minutes
The minutes from the Federal Reserve’s meeting at the end of July were published on August 16, 2017. The Federal Open Market Committee (or FOMC) signaled a potential slow rate of hikes going forward, given the lagging inflation. As we’ve noted in the previous part of this series, inflation has continued to run behind the Fed’s target of 2.0% core inflation.
Although the Fed members seem to be divided on the future of rate hikes, most of the market participants are not expecting a rate hike when the Fed meets in September 2017. However, a December 2017 rate hike could be likely. The market is now factoring in a 40% chance of Fed hiking rates in December compared to the 50% chance before the minutes were released.
Likelihood of a rate hike
Investors should note that Fed kept the target rate between 1.0%–1.25% in July after increasing it 0.25% in June 2017. At its June policy meeting, the Federal Reserve hiked the interest rate by 25 basis points for the second time in 2017. It highlighted strong household spending, expanding business fixed investment, and steady job growth as the major factors contributing to US economic activity.
While most of the market participants see a reduced likelihood of increasing rates in December, J.P. Morgan (JPM) has a different point of view. As reported by CNBC, Marika Dysenchuk, fixed income client portfolio manager, said, “While we will need to see inflation tick up for the Fed to hike, we certainly think they are in play for December.”
Dysenchuk maintained that the other side of the equation, the labor market, remains quite robust, strengthening the case for a rate hike.
Fed’s rate hike and gold
The Fed had guided for three rate hikes in 2017, out of which two have been completed. Another hike would depend on the data leading to the meeting. Investors should keep a close eye on the job market and inflation data for further clues on the Fed’s path regarding interest rates.
Although higher interest rates are negative for gold’s investment appeal, hikes during weakening economic conditions could be conducive for gold. This scenario could benefit gold stocks (GDX) such as Yamana Gold (AUY), Hecla Mining (HL), First Majestic Silver (AG), and AngloGold Ashanti (AU).